The 2019 Loan Charge came into effect on 5 April 2019 and was introduced by HMRC to tackle the use of disguised remuneration schemes by both corporates and self-employed individuals. Essentially it is a way for HMRC to recover unpaid taxes by people who have used a disguised remuneration scheme since 6 April 1999. It is estimated to raise £3.2bn, with 75% of this coming from employers.

What is a disguised remuneration scheme?

Disguised remuneration schemes aim to circumvent the payment of Income Tax and NICs. They involve paying the scheme user their income in the form of a loan, however the loan is never intended to be repaid. From the outset the money exchanged is no different to normal income and therefore in the eyes of HMRC is taxable.

Who could be impacted?

Schemes used by corporates may include making loans or payments to a third party, such as an offshore Employee Benefit Trust (EBT), which then provides an employment-linked loan to shareholders, employees or connected parties. Schemes used by self-employed individuals (including partners in a partnership) may include situations where payments have been made to a “third party or scheme promoter”, a deduction has been claimed for such a payment and then the third party has provided a loan (less a fee) to the self-employed individual. 

The charge applies to all employment linked and scheme linked loans made since 6 April 1999 that were still outstanding on 5 April 2019 and the employer, employee or self-employed individual has not already entered a settlement agreement with HMRC. Scheme users who haven’t settled or haven’t reached a settlement agreement with HMRC within the agreed timeframes will have to report and pay the loan charge. Where a scheme user was an employee and their employer still exists and is in the UK, HMRC typically collects the loan charge from the employer through the Pay As You Earn (PAYE) system.

Where a scheme user was not an employee, or their employer was off-shore or no longer exists, the individual user will need to pay any outstanding loan charge liability or agree a payment plan by 31 January 2020.

It should be noted that there is no appeal process or ability to delay the loan charge if you are caught by the rules. However, HMRC may agree for the tax to be paid in instalments whereby the taxpayer is genuinely unable to make the full payment of tax.

The financial impact

The effect of this may result in individual or corporate taxpayers assuming a significant tax liability.

Some taxpayers will have the means to pay these immediately but for many others they may have the capital tied up in assets but not the cash to settle the debt within a short timeframe. This will likely involve working with an adviser to provide HMRC with details of assets & liabilities and income & expenditure, together with supporting evidence.

Inability to pay

In these circumstances, advice should be sought early to protect assets from bankruptcy and explore options to repay debts in full, but with the benefit of more time.

At Johnston Carmichael we have dealt with many solvent individuals who have been made bankrupt by a creditor and lost control of the process. This can often result in significant extra costs and the potential loss of the family home and other assets.

A statutory debt payment programme already exists in Scotland in the form of the Debt Arrangement Scheme (DAS) and an equivalent process is expected to be available to taxpayers in England, Wales and Northern Ireland in 2020. The advantage of these schemes will be the avoidance of bankruptcy and protecting key assets, usually the family home, allowing repayment of debts over an extended period, which is more affordable and freezes interest. This is a good solution for all stakeholders as creditors can expect to receive all their money back less the costs of administering the plan.

If the level of debt assessed is completely unaffordable and disproportionate to the level of assets and income a taxpayer has, then an insolvency solution may be the only way to be discharged of the debt and for them to move forward with their lives.

Where to seek advice

Individuals should be cautious about seeking advice from any business that is not authorised and regulated by the Financial Conduct Authority. There are instances of solutions being offered which may not be the most appropriate fit for the individual. This can result in the debt being returned to the individual a few years later and with no reduction in the debt amount.

Any solution that relies on a contribution from income has to be sustainable over the proposed period.

At Johnston Carmichael we can work with you to assess your individual circumstances through our Money Advice Service, liaise with HMRC on your behalf and provide future tax planning from a team of 130 award-winning experts. Contact me or a member of our restructuring or tax teams for an initial chat if you think you could be affected by the 2019 Loan Charge.